Why Tokenize a Commercial Real Estate? Part 1

· Real Estate

The world is filled with business ideas that are congruent in being lucrative but contrasting in a few aspect. On one side, there are businesses that are driven by new age Technologies that might see a peak on the short term, and on the other side, you have businesses that have been evergreen in their promise of return on investment.

Perhaps the Holy Grail of profiteering should be something that combines the best of both these aspects. Enter the world of blockchain and tokenization and its possibilities of how it can transform the classical awesomeness of real estate, and we are looking at one of the most promising business ideas of all time!

Tokenization of real estate

The advent of blockchain Technology has enabled us to explore options to tokenize different assets arranging right from art to startup investments, and real estate should not be an exception. Tokenization, as most may have known, is a digital representation of a tangible physical asset on a blockchain through a cryptographic unit called a token. Tokenization has been proven to bring to the table, a lot of advantages. In the oncoming paragraphs, let us discuss the advantages of tokenization with respect to commercial real estate.

Why should commercial real estate be tokenized?

Without second question, real estate is one of the most dependable verticals of investment. However, this title does not get conferred without a few black marks. 👉​Tokenization of real estate is expected to erase these black marks and make real estate more dependable and lucrative than it already is. Although there are many attributes of real estate that tokenization and blockchain Technology can change, let us look at one of them in detail.

Liquidity

Any person who is into investment and investment banking will not find the term ‘liquidity’ alien. One of the greatest deterrents that inhibit investors in exploring real estate is the lock-up period which is in the vicinity of half a decade. The invested fund is illiquid until the project is sold or complete, which also introduces a discount-factor into the illiquid investment, known as the Liquidity Discount. This lock-up period renders the portfolio rigid and unmodifiable. Bringing in the factor of unpredictable market fluctuations further dampens the interest of the investors in real estate.

Intermediaries

Real estate represents the largest class of assets on the planet. Dealing with such a humongous volume of assets also brings in a lot of intermediaries like brokers, transfer agents, lawyer, regulatory bodies and government officials. The commercial elements involved in the transactions and the profits that could be netted by the involved intermediaries has contributed to the inertia of a real estate when it comes to imbibing technological advancements.

On research by the Harvard Business School estimates that there are over USB 5.5 trillion of scrutinized home mortgage us, USD 500 billion of commercial mortgage-backed securities (CMBS) and about USD 200 billion of real estate investment trusts (REIT). The surprising fact is that all this money was not invested in real estate before the early 1990s.

Publicly listed Real Estate Investment Trusts (REITs) introduced liquidity to the real estate market in 1960. However, solving one problem has only resulted in another - managing liquidity has been expensive to set up and a challenge to manage because it was too cumbersome.

The Panacea of tokenization

Tokenization has capitalized on this advantage of liquidity and has eliminated the involved challenges that came bundled with REITs. Liquidity in real estate is no longer an expensive and complicated affair.

The tokens can be traded on an exchange irrespective of it being centralized or decentralized and irrespective of the time of the day and the day of the week. REITs, on the other hand, could be traded only during the hours of market operation.

Eliminating the need for expensive intermediaries, tokens are easily Transferable for a negligible fee for the network.

There is no hard and fast lock-up period. This would mean that the investors can trade in and out of their holdings at their own will and wish.

The cost involved in securitizing assets on a blockchain amount to less than 100 of the normal cost as reported by Coindesk.

The tokens are traded at their Net Asset Value (NAV), and its value is not contingent upon the traditional equity markets. This presents a great Avenue for profitability as REITs typically trade at a discounted rate because of the absence of liquidity.

Recognizing the potential of the Confluence of blockchain and commercial real estate, our aim is to develop private core-plus and value-added commercial real estate Fund with the Promises of liquidity and with the potential for private market returns.

Opening the market to all the accredited investors who comply with the Know Your Customer and Anti-Money Laundering (KYC and AML) formalities makes the event of liquidity quite probable. Breaking all the geographical barriers of investment translate into an increased trading volume and liquidity that is quite congruent with that of the public market.